37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
356 Part Ill: Put Option Strategies
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while. That is, one would not actually make investments, but would instead follow
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prices in the newspaper and make day-to-day decisions without actual risk. This will
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allow the inexperienced strategist to gain a feel for how these complex strategies per
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form over a particular time period. The astute investor can, of course, obtain price
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history information and track a number of market cycles in this same way.
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SUMMARY
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Puts and call can be combined to make some very attractive positions. The addition
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of a call or put credit spread to the outright purchase of a put or call can enhance the
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overall profitability of the position, especially if the options are expensive. In addi
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tion, three advanced strategies were presented that combined puts and calls at vari
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ous expiration dates. These three various types of strategies that involve calendar
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combinations of puts and calls may all be attractive. One should be especially alert
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for these types of positions when near-term calls are overpriced. Typically, this would
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be during, or just after, a bullish period in the stock market. For nomenclature pur
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poses, these three strategies are called the "calendar combination," the "calendar
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straddle," and the "diagonal butterfly."
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All three strategies offer the possibility of large potential profits if the underly
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ing stock remains relatively stable until the near-term options expire. In addition, all
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three strategies have limited risk, even if the underlying stock should move explo
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sively in either direction prior to near-term expiration. If an intermediate result
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occurs - for example, the stock moves a moderate distance in either direction before
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near-term expiration - it is still possible to realize a limited profit in any of the strate
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gies, because of the fact that the time premiums decay much more rapidly in the
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near-term options than they do in the longer-term options.
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The three strategies have many things in common, but each has its own advan
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tages and disadvantages. The "diagonal butterfly" is the only one of the three strate
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gies whereby the strategist has a possibility of owning free options. Admittedly, the
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probability of actually being able to own the options completely for free is small.
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However, there is a relatively large probability that one can substantially reduce the
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cost of the long options. The "calendar combination," the first of the three strategies
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discussed, offers the largest probability of capturing the entire near-term premium.
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This is because both near-term options are out-of-the-money to begin with. The "cal
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endar straddle" offers the largest potential profits at near-term expiration. That is, if
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the stock is relatively unchanged from the time the position was established until the
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time the near-term options expire, the "calendar straddle" will show the best profit
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of the three strategies at that time. |